Spectra in Neutral Lane

We reaffirmed our Neutral recommendation on Texas-based natural gas pipeline company Spectra Energy Corporation (SE), on May 9, 2013. The company posted stable profits boosted by higher customer usage but lower transportation revenues dragged down the top line in the first quarter. The company holds a Zacks Rank #2, which is equivalent to a short-term Buy rating.

Why Maintained?

Spectra Energy is one of North America’s premier natural gas infrastructure plays with a strong presence in growth markets. These positions should lead to value-creating growth opportunities in the coming years.

Though we believe commodity price concerns remain for the near term, the company’s core fee-based businesses of storage, transmission, distribution and Canadian gathering and processing have the potential to move the needle toward solid earnings and cash flow growth in the long run. Spectra acquired the Express-Platte pipelines from Kinder Morgan and two Canadian pension funds in Mar 2013. This acquisition enables the company to diversify its portfolio from the commodity risks related to natural gas liquids to a growing market of crude oil pipeline business. The acquisition will likely add $0.03 to $0.05 per share to annual earnings in the first year. Going forward, Spectra intends to increase its presence in the oil and refined products pipelines, storage tanks and terminals business.

Management remains optimistic on its future performance on the back of its expansion program, which remains on track. With its market leading position, diversified asset portfolio and strong investment opportunities, we expect Spectra Energy to sustain the growth momentum. Additionally, Spectra plans to invest $1 billion per year through 2015 on fee-based gas infrastructure growth projects. The company expects to commission around 8 projects through 2016. Among these projects - Southern Hills and Sand Hills Pipelines, Front Range Pipeline, and Texas Express Pipeline, are expected to be come online by 2013.

However, Spectra’s results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the company clearly suggests that volatility in natural gas prices will change little going forward. Major investments in several projects in Canada also expose Spectra to fluctuations in currency rates that may affect the results of its operations.

Other Stocks to Consider

There are other stocks in the sector that appear more rewarding. These include EPL Oil & Gas, Inc. (EPL), Dawson Geophysical Company (DWSN) and SM Energy Company (SM) , which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).